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Want to Start a Vape Shop? The Economics Behind the Business

When Oxford Dictionaries coins “vape” word of the year, you know the industry is blowing up mainstream culture. As new technologies became available and smokers searched for a healthier alternative, electronic cigarettes erupted into the market in the mid-2000s and ever since, inhaling vapor from tobacco, marijuana, and other nontobacco liquids have become a way of life.

Looking at the numbers, vaping isn’t going away anytime soon. The industry is forecast to reach $3.5 billion this year, Bonnie Herzog, senior tobacco and beverage analyst at Wells Fargo Securities, told the crowd at the National Advisory Group (NAG) conference in San Antonio last year. This is a considerable jump from the industry’s current size of $2.5 billion and more than twice its $1.7 billion size in 2013.

Graham Gibson, CEO and founder of vape company KandyPens, tells Fundera the margins in the industry are “very high.”

“It’s incredibly profitable,” he says. “That’s why you have the term ‘the green rush.’”

How did vaping get so popular? A lot of it comes down to the decline of smoking as a result of our modern health-conscious society. Consequently, the demand for a healthier alternative increased and a number of research hints that vaping could be the answer since it’s better than smoking in that users aren’t inhaling harmful toxins. Additionally, as more states legalize marijuana, vaporizers made specifically for marijuana leaves and flowers have also peaked in sales.

When an industry becomes this popular, the business world takes notice. In 2013, more than 3,500 independent vape shops existed around the country and they continue to be one of the fastest-growing business trends today. If becoming part of the vape trend sweeping the nation is something that entices you, below are a few points you should consider:

1. Don’t underestimate upfront costs.

There are a few things required of all business owners: decide on a name, register your business name, find a location, and agree on a supplier. Once you’ve completed this checklist, it’s time to to think about what kind of licensing and insurance you need. When considering different insurance options, know that many insurers will view vaping businesses the same as tobacco companies and will apply similar terms in your policies.

In a 2013 report, Jon Merton, founder of Vapor Craze in Long Beach, Calif. estimates that opening up a vape shop costs anywhere between $7,420 to $10,020 minimum monthly, not including product.

2. Know that it will be a challenge to get funding.

Aside from preparing for high upfront costs, vape shop owners should also know that it’s hard to get financing in this business. Despite its high profitability, banks put you in the riskiest category — along with the adult entertainment industry — and charge exorbitant rates for their loans. That is, if you’ll even get approved.

Gibson, whose SkyCloud and the Black Edition pens were named “Top Vapor Pens of 2015” by High Times magazine, says that even though “vaporizers have become more PC now to talk about,” it’s still not accepted in the business world.

“It’s hard sometimes to convince colleagues or peers that we’re doing something that is legitimate and also generates an incredible amount of revenue,” he says. But if you’re going to speak to someone about funding, make sure you know your numbers and profits.

3. Consider pending regulations from the Food and Drug Administration (FDA).

For those who want to jump onto the vaping bandwagon, there might be something standing in your way: the FDA. Currently, retailers of vape liquids and electronic cigarettes are not subject to go through the same application and approval process that tobacco companies do. But that might change this year. The FDA, which has regulatory authority over anything to do with cigarettes, tobacco, and smokeless tobacco, might require vape liquid brands to seek approval, which would dwindle the industry from thousands of products to around 20, reported CNBC. This would be a huge problem to vape shops that need the variety of vape liquids much like local bars need craft beers to attract customers.

4. Stand out by knowing your market.

As more vape shops pop up around the country, you’ll need to know exactly how you’re going to deal with the competition. Why should customers visit your vape shop instead of another one? To know this answer, you first need to get to know your market. Who are your customers and what do they pay for tobacco cigarettes? The website eCig One writes:

“Equally important is the need to understand the tobacco sales climate in your area. Marketing e-cigarettes is easy in states such as New York and Illinois where the price of cigarettes exceeds $10 per pack. In states such as Virginia and Tennessee, you’ll need to present a more compelling case for the fact that your customers can save money by switching to e-cigarettes. Although we as e-smokers certainly hope that e-cigarettes can help to reduce the harm caused by tobacco, it’s the price that ultimately makes the sale. You’ll need to make sure that your product lineup can compete head-on with the packs of cigarettes that your potential customers are currently buying.”

It’s also important to know if other vape shops exist in the neighborhood. If not, how will get your name and brand out there? If yes, what kind of inventory will you stock that will give people a reason to return to your vape shop? One major reason people will choose your shop is determined by the inventory available. Not only should you have a wide selection of different flavors, you should also consider the different levels of nicotine strengths people prefer.

Gibson says whatever you do, never forget that it’s all about the customer service, especially in an industry where there are so many different varieties to choose from.

5. Capitalize on the community aspect.

The vape world has been called a subculture where smokers depend on each other to quit cigarettes and vaping helps them do just that — while socializing at the same time. There’s “vape talk,” vape shops and inside those vape shops, there are vaping magazines and vape-inspired accessories. If you’re going to open up a vape shop, think about how you can become part of that community. Will you host movie night and book signings? It might be worth it to carefully consider the layout of your vape shop. Is it comfortable, clean, inviting, and allows vapers to sit and chat with one another? If so, you might find that your vape shop has an edge above the others simply because vapers want to hang out there.

Whether you’re seriously considering starting a vape shop or simply just interested in the industry, you can’t ignore the numbers the vape industry is raking in. It seems all vape shop owners talk about is fast growth and high profitability. But like all businesses, no matter the industry, business owners need to do their homework and asses the risks they’ll be taking. If your business fails, you’ll know you did your due diligence. If it succeeds, you’ll become part of a subculture that’s definitely in for a high ride.

 

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Vivian Giang

Contributor at Fundera
Vivian Giang is a freelance journalist who covers strategy, leadership, organizational psychology and gender issues for Fast Company, Marie Claire, Fortune, Slate, among others. Previously, she was the lead entrepreneurship editor at Mic.com. Prior to that, Vivian launched the Careers vertical at Business Insider, which focused on the evolving office, emerging industries, and the most current employment trends. You can find her on Twitter at @vivian_giang.